Many Canadians have been pleasantly surprised at how quickly money has accumulated in their savings accounts during the stay-at-home lockdowns.
However, cash generates only modest interest, and even low inflation will gradually whittle it away. Depending on your personal situation, these savings could be put to much better use. Here are three options to consider.
Create or add to an emergency fund
If an unexpected event upends your world, you may need money fast. In particular, if you’re concerned about your future job stability due to COVID, you should leave an appropriate sum parked in an emergency fund. Consider putting the money into a TFSA with a short time horizon.
Pay down debt
Paying down debt is just like getting a guaranteed, tax-free return equal to the rate of interest. The best use of your cash could be paying off high-interest debt such as credit-card purchases, lines of credit or student loans.
While mortgage interest is typically at the low end of the scale, increasing your payments will reduce the principal faster and pay off your house earlier.
Add to your investment portfolio
If you have contribution room, you could invest in a tax-advantaged registered savings account such as an RRSP or TFSA.
RESP: With an RRSP, your contribution will reduce your taxable income, resulting in a lower tax bill for the year, and your investment grows tax-deferred until withdrawal.
TFSA: The money you invest in a TFSA is from your net income, so there’s no tax break at the time of contribution. But your earnings grow tax-free, so no taxes are owed upon withdrawal.
If you’ve already maximized your registered contribution room, consider opening or adding to taxable accounts.